Institutional Equities

Bata India 9 January 2017

Reuters: BATA.BO; Bloomberg: BATA IN

We visited Bata India’s plant in Batanagar, Kolkata. We interacted with Mr. NOT RATED Sanjay Kant – manufacturing , Mr. Maloy Kumar Gupta – company CMP: Rs473 secretary and Mr. Pushpendu Jha – general manager, manufacturing. We also got a chance to speak to Mr. Mateo Lambert who heads the product Sector: development team. He has been with Bata India (BIL) since the past 18 months. Akhil Parekh Earlier, he was working in Europe for an European manufacturing Research Analyst company in similar capacity. After our meeting, we visited different [email protected] manufacturing units of the plant. +91-22-3926 8093 Plant capacity: The Batanagar facility is currently the largest facility of Bata Shoe Organization (BSO) and the oldest shoe factory in India which has been in existence since 1934. It is the first shoe factory in India to introduce modernisation in footwear Key Data

Meet Meet Update industry. The plant is situated ~18km south of Kolkata (~1.5 hours from Kolkata Current Shares O/S (mn) 128.5 airport) spread across 46 acres of land. BIL manufactures ~50mn pairs of of Mkt Cap (Rsbn/US$mn) 60.7/893.1 which ~50% are made in-house while the rest are outsourced. Batanagar facility 52 Wk H / L (Rs) 614/399 manufactures ~12mn pairs of shoes (~26% of total BIL output) per year. A wide variety of shoes are manufactured at this plant. Different units manufacture cemented Daily Vol. (3M NSE Avg.) 493,209 shoes, closed shoes, open sandals with PU (Polyurethane) pouring, etc. Batanagar facility has the highest productivity among BSO units for PU pouring, with an output of One-Year Indexed Stock 144 pairs per hour in case of closed shoes and 229 pairs per hour in sandals. The 130 output of built-up rolled sole canvas is likewise an efficient 275 pairs per hour. The 120 110

plant has employee strength of 1,900. 100 Product development unit: One of the units at Batanagar facility is for product 90 development. The product development team, which is the crux of shoe 80 70 manufacturing process, is headed by Mr. Lambert. The product development team Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 comprises ~60-70 designers who come with different technical backgrounds. These BATA INDIA LTD Nifty 50 designers are then trained in-house and usually equipped with multiple skill sets. They are responsible right from product designing to engineering. Shoe lasts – Price Performance (%) wooden or plastic moulds that simulate the shape of the foot – are later placed inside the completed shoe and are used to ensure men’s shoes provide the desired fit. Shoe 1 M 6 M 1 Yr

designing begins with designing basic types of lasts and also involves developing Bata India 11.0 (13.6) (3.4)

Plant Visit Management & Plant

templates for different types of shoes. Designers at Batanagar facility use Nifty Index (0.2) (1.0) 8.5 Shoemaster – Creative software which allows creates 3D designs and reduces the Source: Bloomberg need for physical samples and thus minimises costs. Apart from Shoemaster Creative, designers also use Shoemaster Power for design and pattern engineering. Shoemaster Power is e-last compatible allowing receipt of e-lasts from last maker or 3D scanner. Product cycle usually is around six months which includes the time from conceptualisation to placement in stores. The time taken once the product designing is done to final production is usually six to eight weeks. For the shoes that are outsourced, design and specifications are provided by the company to third party vendors. Once the shoes get manufactured as per the company’s design and specifications, they get further audited. These third party vendors are usually exclusive to BIL. Raw material sourcing: Product development unit consists of a sub-unit called ‘Material Library’ which has different raw materials that go into manufacturing shoes. BIL sources its raw materials from different certified local vendors. Every material is procured from at least 2-3 three vendors, but not more than 9-10 vendors. Material Library also has competitors’ samples so as to get a better understanding of products and quality of raw materials.

Institutional Equities

Store count: There are 1,265 Bata stores spread across 500 cities. Approximately 800 stores are in Tier I cities while the rest are in Tier II and Tier III cities. There are 102 exclusive Hush Puppies stores and 40 foot-in stores. In the past few years, BIL added an average 100 stores every year at the gross level. However, post demonetisation, the management is a bit cautious and does not expect store expansion to happen at the past rate. Royalty payment: Royalty payment on an average costs BIL around 1.0%-1.5% of total sales. Hush Puppies usually command higher royalty fee at ~5% of total turnover. Royalty fee, as percentage of total turnover, has been declining over the years. During loss-making years, the parent company or BSO waived off royalty fee. Support from parent company: BIL gets support from BSO in various aspects. The parent company assists in technical, shoe sole and design improvement, and also marketing and manufacturing process improvement. BSO does not enforce rules, but merely provides the guidelines to BIL. We also had a meeting with Mr. R K Gupta, chief financial officer (CFO) of BIL, to understand the company's strategy going forward. Mr. Gupta has been associated with Bata since 1986 and has worked in various capacities. Before joining as CFO of BIL in October 2015, he was working at Bata, Kenya. Impact of demonetisation: The first couple of weeks after demonetisation were tough. However, the management believes that sales are recovering. Wholesale sales, which make up for 15% of total sales, have been impacted more than the retail segment. Broad strategies Focus on youth segment: This segment was not a key focus area for BIL in the past. However, BIL now feels that with growing youth population and rising disposable income, youth segment will be key driver of growth. The company hired an Italian designer Mr. Lambert in late 2015, who is currently head of product development team comprising 25 designers based in Gurgaon and 70 designers in Kolkata. Since the past two months, BIL has introduced many trendy and fashionable shoes targeting youth segment. Average selling price of these Italian designer shoes is ~Rs3,000-5,000/pair in case of men and Rs2,000-3,000/pair for women. Rising sales of these products will help BIL to climb up the value chain. Premiumisation of products: Average selling price or ASP of BIL shoes is ~Rs700/pair while in case of Hush Puppies (10%-11% of total sales) it is ~Rs2,500/pair. The company has been introducing better designs to improve ASP. Hawaii chappals, which the company used to sell for Rs60/pair in the past, now sell for Rs250/pair. Inventory management: This was an issue in the past. Inventory level stands at around six months. Mr. Gupta believes that it will be brought down to five months in another six months to one year. Inventory costs are expected to go down by Rs1,000mn-Rs1,500mn. Training to retail workforce: The retail workforce, which directly faces clients, was not very aggressive in pushing BIL’s products and cross-selling them in the past. To tackle this problem, BIL trained 2,000 retail personnel out of 6,000 last year at the retail academy and at regional offices for a week. The retail workforce is trained in various key aspects, mainly improvisation of in-store experience for customers, communication skills and product knowledge. The management is confident that this will help improve customer service and contribute to sales. Sales segmentation: Men’s shoes contribute 50%-55% to sales while women and kid footwear account for 30%-32% and 7%-8%, respectively. Brand-wise, core Bata brands account for 70%, Hush Puppies 10%-11%, Power brand accounts for 10% and accessories 8%-9%. E-commerce sales: BIL has tie-ups with major e-commerce portals. Sales through e-commerce channels account for ~2%-3% of total sales. 80% of the shoes sold through e-commerce portals is exclusive, while 20% of the shoes overlaps with brick and mortar stores’ shoe line. Currently, there are 500 exclusively designed shoes sold through the e-commerce route. Other key points: BIL pays ~17.5% in indirect tax. Post Goods and Services Tax or GST implementation, if the company comes under the tax bracket of 18%, GST will be neutral for the company. At the senior management level, BIL hired Mr. Anand Narang as its new marketing manager. Mr. Narang played an instrumental role in launch of Reliance Lyf phone. BIL expects to go for capex of Rs1,000mn every year for the next three years.

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Institutional Equities

Financial summary Y/E Mar (Rsmn) CY09 CY10 CY11 CY12 CY13 FY15 (15M) FY16 Revenues 10,917 12,582 15,425 18,425 20,652 26,940 24,181 YoY (%) 10.6 15.3 22.6 19.4 12.1 4.4 12.2 EBITDA 1,295 1,679 2,305 2,744 3,218 3,349 2,706 EBITDA (%) 11.9 13.3 14.9 14.9 15.6 12.4 11.2 Adjusted PAT 672 954 1,165 1,716 1,994 2,044 1,552 Reported PAT 672 954 2,259 1,716 1,908 2,312 2,187 FDEPS (Rs) 5.2 7.4 9.1 13.4 15.5 12.7 12.1 YoY (%) 10.7 41.8 22.2 47.3 16.2 (34.4) 18.7 RoE (%) 21.5 26.0 46.5 26.9 24.8 19.9 19.8 RoCE (%) 21.2 26.0 23.3 26.1 25.5 17.7 14.2 RoIC (%) 25.4 36.9 31.8 32.9 35.6 22.8 18.6 P/E (x) 90.4 63.8 52.2 35.4 30.5 37.2 39.2 Price/sales (x) 5.6 4.8 3.9 3.3 2.9 2.8 2.5 EV/EBITDA (x) 46.6 35.4 25.9 21.6 18.1 21.9 21.2 Note: FY15 comprises 15 months as the company changed its financial year-end from December to March. Source: Company, Nirmal Bang Institutional Equities Research

3 Bata India

Institutional Equities

Financials (consolidated) Exhibit 1: Income statement Exhibit 2: Cash flow Y/E March (Rsmn) CY12 CY13 FY15 (15m) FY16 Y/E March (Rsmn) CY12 CY13 FY15 (15m) FY16 Net Sales 18,425 20,652 26,940 24,181 EBIT 2,230 2,626 2,557 1,953 % growth 19.4 12.1 4.4 12.2 (Inc.)/Dec in working capital (267) (111) (1,223) (497) Raw Material 8,680 9,488 12,378 11,560 Cash flow from operations 1,964 2,515 1,333 1,456 Staff 1,959 2,133 3,119 2,627 Other income 300 313 432 301 Rent 2,154 2,620 3,743 3,363 Depreciation 514 592 792 752 Freight 407 429 498 525 Deffered Liabilities (101) (237) (195) (143) Commission 565 642 862 720 Interest paid (-) (10) (13) (18) (17) Others 1,915 2,121 2,991 2,679 Tax paid (-) (804) (935) (928) (685) Total Expenditure 15,680 17,433 23,591 21,475 Dividends paid (-) (448) (489) (489) (543) EBITDA 2,744 3,218 3,349 2,706 Extraordinary Items - (86) 268 635 % growth 19.1 17.3 (16.8) 1.0 Net cash from operations 1,414 1,661 1,196 1,756 EBITDA margin (%) 14.9 15.6 12.4 11.2 Capital expenditure (-) (838) (697) (1,641) (415) Other income 300 313 432 301 Net cash after capex 576 964 (445) 1,341 Interest 10 13 18 17 Inc./(Dec.) in short-term borrowing 73 (267) - - Depreciation 514 592 792 752 Inc./(dec.) in long-term borrowing - - - - Profit Before Tax 2,520 2,927 2,971 2,237 (Inc.)/Dec. in investments 0 - (1) - % growth 20.0 16.2 (18.8) (5.9) Cash from Financial Activities 73 (267) (1) - Tax 804 935 928 685 Others / Extraordinary income (8) (10) (11) (36) Effective tax rate (%) 31.9 32.0 31.2 30.6 Opening cash 1,229 1,871 2,557 2,100 Adjusted Net Profit 1,716 1,992 2,044 1,552 Closing cash 1,871 2,557 2,100 3,405 % growth 47.3 16.1 (17.9) (5.1) Change in cash 642 686 (458) 1,305 Extraordinaries - (86) 268 635 Source: Company, Nirmal Bang Institutional Equities Research Reported Net Profit 1,716 1,906 2,312 2,187 % growth (24.0) 11.1 (3.0) 18.3 Exhibit 4: Key ratios Dividends 448 489 489 543 Y/E March CY12 CY13 FY15 (15m) FY16 Carried over to BS 1,268 1,503 1,555 1,009 Per share (Rs) EPS (Rs) 13.4 15.5 12.7 12.1 EPS 13.4 15.5 12.7 12.1 % growth 47.3 16.2 (34.4) 18.7 Book value 54.5 65.4 79.5 92.0 DPS (Rs) 3.0 3.3 3.3 3.5 Valuation (x) Payout (%) 22.5 21.9 18.1 20.6 P/E 35.4 30.5 37.2 39.2 P/sales 3.3 2.9 2.8 2.5 Source: Company, Nirmal Bang Institutional Equities Research P/BV 8.7 7.2 5.9 5.1 EV/EBITDA 21.6 18.1 21.9 21.2 Exhibit 3: Balance sheet EV/sales 3.2 2.8 2.7 2.4 Y/E March (Rsmn) CY12 CY13 FY15 (15m) FY16 Return ratio (%) Equity 643 643 643 643 RoIC 32.9 35.6 22.8 18.6 Reserves 6,361 7,767 9,579 11,188 RoCE 26.1 25.5 17.7 14.2 Net worth 7,003 8,410 10,221 11,830 RoE 26.9 24.8 19.9 19.8 Short-term Loans 267 - - - Margin ratio (%) EBITDA margin 14.9 15.6 12.4 11.2 Long-term Loans - - - - PBIT margin 12.1 12.7 9.5 8.1 Total Loans 267 - - - PBT margin 13.7 14.2 11.0 9.3 Deferred Tax Liability (444) (681) (876) (1,019) PAT margin 9.3 9.7 7.6 6.4 Liabilities 6,827 7,729 9,345 10,811 Turnover ratio Gross Block 5,611 6,094 7,265 7,656 Asset turnover ratio (x) 2.7 2.7 2.3 2.2 Depreciation 3,198 3,549 3,883 4,635 Avg inventory period (days) 106 120 134 114 Net Block 2,413 2,544 3,383 3,021 Avg collection period (days) 9 9 10 10 Capital work-in-progress 181 155 166 190 Avg payment period (days) 68 75 87 72 Long-term Investments 49 49 50 50 Solvency ratios (x) Inventories 4,621 5,827 7,047 6,789 Debt-equity - - - - Debtors 449 509 584 696 Growth (%) Cash 1,871 2,557 2,100 3,405 Sales 19.4 12.1 4.4 12.2 EBITDA 19.1 17.3 (16.8) 1.0 Other Current assets 1,276 1,505 2,169 2,294 PAT (24.0) 11.2 (3.1) 18.3 Total Current assets 8,218 10,399 11,900 13,184 Creditors 2,941 3,654 4,545 4,277 Source: Company, Nirmal Bang Institutional Equities Research Note: FY15 comprises 15 months as the company changed its financial year-end from Other current liabilities 1,093 1,763 1,608 1,357 December to March. Total current liabilities 4,034 5,417 6,153 5,634 Net current assets 4,184 4,981 5,747 7,550 Total Assets 6,827 7,729 9,345 10,811 Source: Company, Nirmal Bang Institutional Equities Research

4 Bata India

Institutional Equities

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5 Bata India